Nelson: Tax code laws are partly to blame for tea party targeting

Issue highlights need to streamline bureaucracy at IRS

By David Nelson

Updated
6:35 pm CDT, Thursday, May 23, 2013

The IRS is under heavy fire for its targeting of the tea party and similar organizations when they submitted applications for tax-exempt status. With a 40-year career advising tax-exempt organizations, both as an attorney and CPA, I have studied with interest the recent U.S. inspector general's May 14 report and the IRS response in the May 15 "Questions and Answers" feature of its website.

I understand the outrage that Congress and pundits have expressed toward the IRS and its targeting of tea party applications for tax-exempt status. However, the discourse has left out important and nonpartisan points that influenced the IRS in this targeting fiasco.

For example, many people think the Internal Revenue Service was involved in a sinister plot to target tea party applications from the get-go. However, according to IRS written responses, early tea party applications containing descriptions of potential political, lobbying or advocacy activities caused later applications containing that name to be targeted. That criterion was inappropriate and politically incorrect "profiling," but it was a shortcut and efficient method of handling all tea party applications. Due to a limited staff, the IRS needed to develop workable solutions to handling the heavy increase in volume of similar applications, from conservative and liberal applicants.

Also according to the IRS, even had the tea party applications not been targeted, most of them would have been properly "centralized," or subjected to additional inquiries by IRS staff.

Most media reports focus only on the tea party applications that were targeted. However, the inspector general's report points out that the IRS attempted to subject all applications to centralization that contained indications the organization might engage in political campaigns, lobbying or advocacy.

At least part of the blame for the targeting problem goes to the complexity of the tax law itself. The Internal Revenue Code and IRS regulations caused much of the need for centralization and the need to subject the applications to further inquiry. Most of the tea party and similar applications for tax-exempt status fell under the code sections titled 501(c)(3) and 501(c)(4).

Those code sections say that the organizations in those categories must be operated exclusively for the prescribed tax-exempt purposes. But the regulations that constitute an IRS interpretation of the code provisions state that an organization only has to operate primarily for tax-exempt purposes. Since whether or not an organization is operating "primarily" for tax-exempt purposes is a factual question, it is appropriate that applications describing some level of political, lobbying or advocacy activities be subjected to additional scrutiny.

Congress could help by clarifying the law so that it leaves no wiggle room in its mandate, restricting organizations' activities exclusively to tax-exempt purposes and ensuring that exclusively really does mean exclusively, not just primarily. Nevertheless, my defense of the IRS goes only so far. The delays caused by the inefficient bureaucracy within the IRS in handling these applications were inappropriate and inexcusable.

At this point there is no suggestion in either the inspector general's report or in the IRS questions and answers that the targeting was influenced by sources outside the IRS. But perhaps Congress does need to determine if there was any outside political influence, direct or indirect, involved in the bureaucratic errors that snarled the IRS and applicants.

As a long-time tax professional specializing in the nonprofit area, to me the most troubling of all aspects in the inspector general's report is contained in Footnote 12 on Page 4:

"A future audit is being considered to assess how the EO function monitors I.R.C. sec. 501(c)(4)-(6) organizations to ensure that political campaign intervention does not constitute their primary activity."

It is one thing for the IRS to grant tax-exempt status to advocacy organizations; it is quite another matter to monitor those groups to determine whether they are complying with what they described as their anticipated activities in their applications for tax-exempt status. The IRS has little manpower to accomplish much follow-up of groups that may be crossing the line by way of their advocacy or political activities. The current sequester has made that job even more difficult.

Nelson is a consultant to several large nonprofit organizations in Texas.